ACE

Author: Ziye Guo

  • The Poverty Line in the U.S

    The Poverty Line in the U.S

    The poverty line, or poverty threshold, is the minimum amount of income that a family needs for food, clothing, transportation, shelter, and other necessities, once a year. It represents the border between poverty and non-poverty for administrative and statistical purposes. In many countries, such as the United States, this statistic is adjusted yearly for inflation. An example of the U.S. poverty line in the year 2021 is shown below. The poverty line varies according to the number of persons in a household.

     image4.png

    Source: Department of Health and Human Services

    There are two versions of the poverty line in the United States: 

    • The poverty thresholds are the original version of the federal poverty measure. They are updated each year by the Census Bureau. The thresholds are used mainly for statistical purposes. For instance, preparing estimates of the number of Americans in poverty each year.
    • The poverty guidelines are the other version of the federal poverty measure. They are issued each year in the Federal Register by the Department of Health and Human Services (HHS). The guidelines are a simplification of the poverty thresholds for use for administrative purposes. For instance, determining financial eligibility for certain federal programs such as Project Head Start. 

    Methods of Evaluating Poverty

    One of the methods to calculate the poverty line in the U.S. is the Gallup Poll. The national survey has regularly asked people to report what is the least amount of income a family needs in order to get along in their community. However, it is possible that some interest groups may ask people to inflate their answers with the expectation of higher benefits.

    The other popular method to evaluate poverty is through counting calories. The relationship between hunger and poverty remains strong, and many countries calculate poverty lines by calculating how much it costs to obtain enough food. Such calculation meets a calorie norm of around 2,000 calories a day, which is recommended by nutritional experts at the Food and Agricultural Organization of the United Nations.

    Calories can be converted into money by looking at what people spend and finding the income level at which, on average, people get 2,000 calories. This can be done by plotting what is called the “calorie Engel curve.” For example, in the United States, the poverty line was set by starting not from a calorie norm but from an economic food plan recommended by the Department of Agriculture.  

    Poverty Classification

    • Relative poverty is identified as the inability to participate in society. Relative measures of poverty are often constructed by using poverty lines that move with average income, so that the minimum acceptable income is tied to what other people get. To some people, poverty also means lack of access to education, healthcare, or even entertainment. Relative poverty is a much more complicated concept. This concept of relative poverty is often used in developed worlds.
    • Absolute poverty is simply not having enough to eat or enjoy good health, a severe lack of access to basic human needs. The basic living standards are consistent over time and globally, for example all humans need the same caloric and water intake no matter where they live. 

    The 2001 poverty line in the United States for a family of two adults and two children was $18,000 a year, more than ten times as much as the international “extreme poverty” line of $1 per person per day used by the World Bank and the United Nations. 

    The poverty line is used today to decide whether the income level of an individual or family qualifies them for certain federal benefits and programs. There are numerous United States policies regarding the poverty line, such as the recently passed American Rescue Plan by the Biden Administration. President Biden’s healthcare proposal aims to expand the Affordable Care Act so that 97% of Americans are insured, and will cost $750 billion over 10 years. It would include a public health insurance option like Medicare, which will be available premium-free to individuals in states that haven’t expanded Medicaid and to people making below 138% of the federal poverty level. It would also eliminate the 400% federal poverty level income cap for tax credit eligibility and lower employees’ maximum contribution for coverage to 8.5%. Many federal programs, such as the National School Lunch Program, are created and adjusted based on the poverty line. These programs are made as an effort to make food more accessible for those below the poverty line guidelines each year. The National School Lunch Program was created initially in 1946, with about 7.1 billion children participating that year. The program has grown dramatically, with 30.4 million children participating in 2016. Depending on family income, students can receive reduced or free meals. 

    Some critics argue that measuring poverty in the United States based solely on the cost of food ignores other significant factors that may influence a household or individual’s wealth. For instance, there are a multitude of factors, such as health conditions or access to transportation, that could impact how much someone could earn or how much they must spend. If an individual has a medical condition which their insurance does not cover, their spending will be higher than an individual without such a condition, even if they have the same incomes and spending habits. 

  • Inflation, the Fed, and Monetary Policy

    Inflation, the Fed, and Monetary Policy

    The Federal Reserve is the central bank of the United States, and its main function is to create the conditions for maximum employment, stable prices, and long-term economic stability through monetary policy. Financial regulation is among its other functions, but those are secondary to controlling the money supply.

    The Fed’s primary tool of monetary policy is controlling the federal funds rate, which is the rate at which banks can borrow money overnight from the Fed. This rate affects other interest rates that private banks set. So, when the federal funds rate decreases, real interest rates decrease as well. Lower interest rates means that businesses and individuals take out more loans because it is cheaper to borrow. However, lower interest rates also mean there is increased risk of inflation because the demand for the dollar increases. 

    Structure

    The Federal Reserve is split into 12 districts based on economic activity. Each district is independent of the others but governed by a board of governors, which reports to Congress. The federal government further centralized American central banking in 1933, 1935, and 1980 to make federal monetary policy more effective and cohesive. Several councils within the Fed represent the interests of banking and savings institutions as well as low-income communities, and a council of statisticians oversees forecasting models. Technically, the Federal Reserve is owned by private banks. According to one district, “while the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends. Holding this stock does not carry with it the control and financial interest given to holders of common stock in for-profit organizations. The stock may not be sold or pledged as collateral for loans. Member banks also appoint six of the nine members of each Bank’s board of directors.” 

    Combating Inflation and Historical Context

    Inflation in fiscal year 2021 has thus far exceeded expectations. However, according to the chairman of the Federal Reserve Board, it is not clear yet that there is inflation across the board, which would be indicative of a more worrying, long-term trend (link to my context brief on inflation). In order for the Fed to raise interest rates before late 2022, which is when they currently plan their initial hike, there needs to be more evidence that the economy is overheating. The amount of fiscal support coming out of the COVID-19 recession is unprecedented, which complicates forecasting.

    Inflation was chronically high during the 1970s due to energy crises and structural changes to international trade. To combat chronic inflation, the chairman of the Fed (1979-1987), raised interest rates to 19% in the early 1980s, causing two recessions. Such high interest rates would be ridiculous today (our current effective federal funds rate is 0.08%), but he set such high rates to combat inflation. With higher interest rates, businesses and consumers were incentivized to save, decreasing the demand for cash and goods alike. With decreased demand for immediate spending, inflation receded. After that recession, interest rates have remained relatively low compared to before the two recessions, while inflation has also remained simultaneously low. This is a textbook example of the Fed using interest rate hikes to combat inflation. Moreover, the post-recession years have demonstrated how full employment and stable prices are not necessarily in conflict. We can visualize the relationship between inflation and unemployment over time:

    Chart, histogram Description automatically generated

    Source: The Federal Reserve Bank of St. Louis

    As we can see, inflation has remained low since the 1980s, even during periods of full employment. In general, the business cycle has moderated so that unemployment during a recession remained lower than the unemployment rate during recessions before 1980. The pandemic recession is a notable outlier.

    However, interest rate hikes come with their own set of issues. Part of the problem with predicting how the Fed will react to rising inflation is the lack of data points. Ever since the early 1980s—the first instance of the Fed raising interest rates high enough to combat inflation—there has not been significant inflation in the United States. This stability is one the defining characteristics of the Great Moderation, which describes the last forty or so years of American macroeconomic history during which inflation remained low, expansions were longer and more stable, and GDP grew slower relative to pre-1980 rates (link to business cycle brief)

    Controversies around the Fed: Purview and Modern Monetary Theory

    Some critics—particularly those who want to see more regulation of big businesses and financial institutions—want the Fed to shift its priorities. Proponents of this position —who tend to be progressive Democrats—want to see the Fed tackle issues beyond central banking like climate change. Perhaps the most prominent example of the expansion is the Consumer Financial Protection Bureau, which is an independent organization within the Fed whose mission is to ensure transparency for consumer financial products. The CFPB is primarily concerned with financial products like mortgages, credit cards, and other common financial products in which individuals take on risk. The expansion of the Fed’s authority has not come without obstacles. In October of 2019, the Supreme Court found in the case Seila Law LLC v. Consumer Financial Protection Bureau that the governing structure of the CFPB, which initially stipulated that its director could only be fired for cause, violated separation of powers. Some progressives also want to wrest control of the Fed away from financial institutions and toward a more centralized governance structure.Finally, some progressive economists within this sector ascribe to Modern Monetary Theory, in which fiscal policy is the primary driver of full employment and interest rates remain low. These economists favor an even more expansionary monetary policy; a policy in which the government may spend an unlimited amount of money because it issues the currency it spends. Inflation, the biggest downside risk MMT’s critics cite, would be handled via increased taxation.

  • Ziye Guo, University of California-Irvine

    Ziye Guo, University of California-Irvine

    Linkedin

    Ziye (Janet) Guo is a Research Associate on the economic policy team at ACE. She graduated from University of California, Irvine’s Honors Program with a B.A in Economics, a B.S. in Mathematics and a minor in Statistics. She also has a M.S in Applied Economics with a concentration in Data Analytics from Boston College. 

    Janet has four years of economic research experience in health, urban, financial and macro economics. In her Master thesis, she studied China’s public health system and its relation in preventing COVID-19 outbreak. Janet brings her mathematical skills as well as statistical modeling experience to the team and helps her teammates with the direction of the research projects. She joined ACE aiming to educate the public on economic concepts so they can make more informed decisions. 

    Prior to joining ACE, Janet worked as an accounting analyst for a California tech company and recovered millions of dollars in financial losses. She also has a passion for teaching and worked as an educator for five years. In her free time Janet likes cooking, playing piano and hiking with her friends.